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Intellectual Property - an alternative form of security
29 January 2009
According to some industry observers the Nike trade mark is worth
more than £8 billion and exceeds the value of any land, property or
equipment owned by the company. So it is not surprising that,
particularly in the current economic climate, more businesses are
realising that a well managed IP portfolio can be a valuable means
of leveraging value, particularly as security for loans. However,
due to the unique intangible nature of IP rights, taking security
over IP can be more complex than taking security over tangible
assets.
Forms of security
There are three main forms of security available.
Firstly, there is a legal mortgage which is appropriate where
the IP (registered or unregistered) is identifiable rather than
forming part of a general group of rights. The relevant IP is
assigned to the lender and the borrower retains an equitable
interest in the IP. Legal ownership reverts back to the borrower
when the loan is repaid and if the borrower defaults on repayment
the lender can redeem the IP under the mortgage. This form of
security is often preferable to lenders as they take legal title
from the outset. Under other forms of security an assignment of
legal title must be completed in the event that the borrower
defaults on repayment.
Secondly, a lender may opt to take a fixed charge over IP.
Again, this form of security is used for registered or unregistered
IP rights that can be properly identified. Here, the lender takes
an equitable interest in the IP and the borrower retains legal
ownership unless and until default, at which point the charge fixes
on the IP.
Thirdly, a floating charge may be taken. This type of charge is
used for unregistered IP, where it is not easily identified or
defined or where a floating charge is being taken over all of the
company’s assets and the IP is just one of the assets being secured
by the charge. The charge floats over the unregistered IP and the
borrower can deal with the IP unless and until he defaults, in
which case the charge crystallises into a fixed charge. This form
of charge is less valuable to lenders as holders of fixed charges
and preferential creditors take priority with respect to the
proceeds of sale of the assets.
If you are looking to use IP as security in other jurisdictions,
you should take separate legal advice for that jurisdiction, as the
position can vary.
Issues for the borrower
Using IP as security
The above shows that the form of your IP affects whether or not
a lender will accept your IP as security and the form of security
taken by a lender. It is therefore advisable to maintain your IP in
a way that makes it suitable for use as security. Lenders will be
looking to see where the value is with respect to the IP being
offered as security. In particular, whether there is value in the
IP that is separate from the borrowers’ business and whether there
is value in the IP that is separate from other IP of the
borrower.
Registering your IP will mean that the IP and title to the IP
are easily identifiable, plus there is a register in which the
lender can record its security interest. A Community trade mark or
design registration may be more attractive to both the lender and
the borrower for use as collateral, as opposed to a number of
separate national registrations. Such Community rights give the
owner exclusive rights in the 27 member states of the European
Union but consist of only a single registration. You should ensure
that all registered IP is properly maintained, i.e. renewal fees
paid, as this is something a lender will check. If the IP is not
registrable try to ensure that it can still be easily defined and
identified from other IP and that the chain of ownership can be
demonstrated. Monitoring and recording the creation of IP within
your business and ensuring that all IP created vests in the
business will help.
You should ensure that any IP which you plan to use as
collateral is not already subject to any encumbrance, such as a
prior security interest or licence. It is also important to
maintain the value of the IP, for example, enforcing the IP against
third party infringers and defending claims that the IP is invalid.
A failure to properly maintain and protect your IP may indicate to
a lender that the IP is not valued by the business and is not
therefore a good form of collateral.
What type of security?
You should think carefully about the effects that the form of
security chosen, i.e. mortgage or charge, will have upon your IP.
Consider whether it is appropriate for the IP to be transferred to
the lender, as required by a legal mortgage. If the IP is
fundamental to the business, and the company’s freedom to deal with
the IP as it chooses without restriction is vital, a legal mortgage
may not be appropriate. If you proceed with a mortgage, then you
need to ensure that the licence back to you is clear and is
sufficient to enable you to continue running the business, as
required. The licence should be exclusive so that the lender cannot
use, or permit others to use the IP, and so that where permitted by
law you can bring proceedings in respect of the IP. Also, consider
whether you will need to be able to sub-license or sub-contract the
use of the IP for the operation of the business. As the intention
will be for you to take back legal ownership to the IP, you should
ensure that the lender deals with the IP appropriately and renews
the registration where renewal is its responsibility; clearly it is
in the lender’s interest to do this but it is sensible to
monitor.
Where a fixed or floating charge is being sought it is likely
the lender will want to place certain restrictions over the IP, for
example, you may not create other security interests over the IP or
assign or sub-license without the lender’s consent. Whilst such
restrictions are to be expected, you should ensure that they are
not to the detriment of the business and to its operation. To this
end you must consider carefully how the business currently uses the
IP concerned and how it may need to use the IP in the future and
make sure that the form of the charge does not interfere with such
use.
Dealing with your secured IP
Registration requirements
Companies registered in England and Wales must register certain
security interests with the Registrar of Companies at Companies
House within 21 days of execution of the transaction. Furthermore,
all assignments and licences of, and security interests in,
registered IP should be recorded on the relevant IP register at
www.ipo.gov.uk within six months of their execution. For the
borrower this is important because failure to do so will mean that
the assignee lender or licensee borrower will be unable to claim
any costs or expenses in infringement proceedings where the
infringement occurred before the registration of the assignment or
licence (as applicable). In addition, the assignee or exclusive
licensee cannot bring proceedings in its own name until the
assignment or licence has been registered. For borrowers with
multi-jurisdiction IP portfolios the potential registration
requirements can be very time consuming and expensive, often at the
borrower’s cost. Borrowers should therefore plan and negotiate with
the lender at the outset a registration strategy that is feasible
and practicable for the borrower. Indeed, borrowers and lenders
should consider carefully in which jurisdictions the borrower’s IP
has the most value. They should seek to use this IP as collateral
rather than an array of less valuable IP from a variety
jurisdictions which would lead to an increase in costs and
administration.
Management
Finally, borrowers should ensure that IP which is used as
security is identified as such within the business and is, together
with the key terms of the security arrangement, notified to the
relevant personnel. This should help to ensure that such IP is
dealt with appropriately and that the terms of the security
arrangement are not breached. This is important, as a breach could
give the lender the right to immediately terminate the security
arrangement and require the immediate repayment of the loan. The
borrower may not be in a position to make repayment at this time
and could therefore end up forfeiting the IP used as security for
the loan.
This article was first published in IP
Review
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